Mr Bevan probably feels that the law has treated him unfairly. One can see his point.
Many years ago, Mr Bevan bought a house, in joint names with his wife. In 2007 they started to let it. They regarded all the rents as belonging to Mrs Bevan with the result that they thought there was no tax liability.
In fact, because the property was in joint names, tax law treated Mr Bevan as receiving half the income. He failed to tell HMRC about it and he was assessed to tax on the income right back to 2007; and charged a penalty of 20% of the tax to boot.
Mr Bevan didn’t dispute that the tax was due. But he objected to the penalty: as an employee under PAYE he had never been within self-assessment; he had no reason at the time to suppose he had done anything wrong; he had simply made an honest mistake.
The case (Bevan v HMRC [2024] UKFTT 586 (TC)) underlines how much more severely the law punishes a failure to notify chargeability than the making of an incorrect return.
If Mr Bevan had been within self-assessment, making tax returns annually, his failure to include the share of rental income on those returns would very likely have been regarded as attributable to his carelessness. HMRC would have been able to recover tax for only six years. The statutory minimum penalty would have been 15% of the tax lost (though it is HMRC’s policy where inaccuracy is discovered more than three years late to charge at least 25% in most cases). And if he had been able to show that the error had been ‘innocent’ (i.e. that it happened despite his having taken ‘reasonable care’), no penalty would have been due and HMRC would have been limited to collecting arrears of tax for no more than four years.
In fact, since Mr Bevan had, as a PAYE-only taxpayer, not been required to file tax returns, his failure to tell HMRC about the rental income allowed them to recover tax not for six years but for up to twenty, and to charge penalties of a statutory minimum of 20% of the tax lost. Further, HMRC’s ability to recover tax did not depend upon their showing that Mr Bevan had been careless in failing to notify them: even if his failure had been completely blameless, the tax would still have been payable. As to penalties, Mr Bevan could escape them only if he had been able to show that he had a ‘reasonable excuse’ for the failure (a different and usually more difficult task than showing that he had taken ‘reasonable care’, and on which he was unable to satisfy the First-tier Tribunal).
It can thus happen that a person who innocently overlooks telling HMRC about a few hundred pounds of income may end up paying a heavier price than someone who carelessly omits a few thousand pounds from a tax return. Fair or not, it’s the law.
For more information on the consequences of incorrect returns or failure to notify HMRC, please get in touch with your usual BKL contact or send us a message.